Research

Diversification Is Key to Success: Strategies for Firms in Financial Crisis

Firms around the world were tested during the financial crisis of 2008–09, and as Darwin might say, only the strong survived. How they survived is the focus behind the research of Robert Grosse, director of the Center for Global Business at George Mason University’s School of Management. Grosse, also a former dean of the EGADE Business School at Monterrey Tec in Mexico, studied six of the largest Mexican corporations (Alfa, Cemex, FAMSA, FEMSA, Proeza, and Xignux) and interviewed key decision makers to see how each of them responded to the crisis.

Grosse says his research presents a “conceptual basis for developing corporate strategy to respond to a financial crisis, and an empirical examination of strategic moves undertaken by a number of large Latin American firms during the crisis and subsequent recession.”

The global financial crisis of 2008–09 (beginning with the U.S. subprime mortgage crisis in 2007) hit Mexico the hardest of any country in Latin America. This was the fourth major crisis confronting Mexico in the past 30 years, offering a prime opportunity for research. As the only country in the world faced with this number of challenges in just three decades, firms in Mexico are more accustomed to critical situations, Grosse says, and therefore have developed strategies to better manage during a crisis than firms in other countries.

Grosse’s research focused on the six firms’ cost, revenue, and risks, since these three factors, he says, account for “strategic responses ranging from changes in marketing strategies to changes in production and distribution strategies, as well as in risk management.”

Overall, Grosse found that those firms that contained diversification of overseas operations and sales in multiple countries around the world (rather than solely in one market) helped mitigate the downturn. Diversification into other industries was also found to provide protection for firms. Firms that diversified sales in other Latin American countries did relatively well (for example, the bottling company FEMSA) and firms that diversified across sectors also tended to do better, such as business groups Carso and Salinas. For instance, the retail store company, FAMSA, opened a successful retail banking division.

The reduction in demand, according to Grosse, pushes the firm on the “revenue” side to look for alternative sources of income or consider moving into new markets. Because of the time it takes to establish or acquire new customers, these strategies will not work in the short term but are medium- and long-term plans for success.

“Both sectoral diversification and cross-country diversification turned out to be significant contributors to explaining relative firm performance during the crisis,” Grosse says.

In addition, Grosse found that the companies all followed the logical cost-cutting steps of reducing production of products that were in less demand during the crisis, laying off some employees in the heaviest-hit businesses, and looking for lower-cost inputs, either by replacing imports with local supplies or by finding lower-cost suppliers in general.

Other innovative steps included shifting production to lower-cost countries, setting up “floating crews” to work on a rotating basis in partially closed factories, changing packaging to less expensive options, finding more efficient shipping routes, and developing down-payment plans on purchases, allowing customers to pay over time as sales generated revenues.

Grosse also examined 112 firms listed on the Mexican stock exchange to “see if the strategies used by the interview sample also contribute to performance of the larger group of firms, which they do,” he says. “In the sample of listed Mexican firms, both sectoral diversification and cross-country diversification turned out to be significant contributors to explaining relative firm performance during the crisis.”

U.S. companies certainly could benefit from these experiences, since scores of them also experienced a downturn during the financial crisis. Those U.S. companies that did fare better during the crisis were diversified into markets overseas, especially in Asia.

This article originally appeared on the School of Management homepage in a slightly different form.

To read more stories about Mason, check out the university’s News site.

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